Thread by @FinFloww

What exactly are Futures and Options? Explained in a very easy and fun way.

Feat: relationship analogies 🤣

A thread 🧵

Do you remember how some superstitions existed in our country,

when parents decided the marriage of their children at a very young age, to mitigate the risk of getting involved in a wrong family?

That is exactly how futures and options work.

Futures and options are basically a contract signed by two parties to trade a stock at predetermined prices to safeguard (or hedge) themselves from the risk involved due to price movement in the market.

Generally only traders experienced and well versed with stock market opt for futures and options, as one wrong move can result in huge losses, exactly how the elders made the match for the marriage.

So, how are futures and options different? One is like being in a relationship and the other is like one sided love.

Future contracts involve the obligation to execute the order at a predetermined price irrespective of profit or loss.

It is exactly like getting in a relationship, you put in effort, you give surprises, because you love the other person, but the future might not be good and could also result in a break up.

Options gives the buyer an option to buy the stock if the person is making a profit, there is no compulsion involved.

It is like being in a one sided relationship, it is all from your side, you feel happy by watching them being happy, you are totally not obliged to how the other person is going to feel.

Future contracts have the same rule for both buyers and sellers while there are two types of contracts for options.

When an individual decides to sell the asset at a pre-decided price in future, they might enter into a put contract.

Similarly if they decide to buy a particular asset at pre-asserted price in future, they will enter into a call contract.

What kind of people invest in futures and options?

Basically who all should get involved in these relationships..

1️⃣ Hedgers - It’s like playing safe with your partner. You don’t want to break up, therefore you take care of every little thing and maintain a healthy relationship.

Hedgers generally enter derivatives to secure their profit from potential losses.

2️⃣ Speculators - They are like casual daters, just beating around the bush. If it hits the right spot, boom it is a win.

Speculators just predict the market based on some analysis and market movement.

3️⃣ Arbitrageurs - Ohh, do you remember those kinds of people who benefit out of a rebound? Yes, they are called arbitrageurs.

They generally gain profits out of the imperfections arising in the prices due to market movements.

Have you ever been in a relationship or entered a future and options contract? How was the experience, share in the comments below!

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